Will American Industrial Policy overcome the PRC’s weaponization of Rare Earth Magnet Production?
Friends,
Perhaps lost in the fast-paced news cycle last week, not everyone noticed a move by the Department of Defense to take an ownership stake in MP Materials and agreeing to a 10-year off-take agreement at a specified price for certain rare earth elements. With the investment by DoD and financing from the private sector, MP Materials will mine in California and build facilities there and in Texas to process neodymium-praseodymium (NdPr) oxide for the manufacture of advanced permanent magnets that go into a variety of defense systems.
As you may remember, one of the most important issues over the last few months in Sino-American relations was Beijing’s decision to embargo a number of critical items including rare earth elements and advanced permanent magnets. The PRC has dominated these industries by ruthlessly pursuing non-economic market dominance in violation of its trade agreements with other countries. As Washington sought to correct wider trade inequities with the PRC, Beijing employed its control over these industries to harm the U.S. economy.
The DoD now owns about a 15% share of MP Materials after acquiring $400 million worth of the company’s preferred stock. This makes the DoD the company’s largest shareholder and provides a template for how the U.S. Federal Government could respond to other instances in which the PRC creates market failures for the purpose of gaining geopolitical leverage.
The DoD investment will enable MP Materials to build a fully integrated permanent magnet production capability. The facilities are slated to produce 10,000 metric tons of neodymium-iron-boron (NdFeB) magnets annually starting in 2028. This could fulfill a large proportion of American demand for these magnets.
Along with the equity investment, DoD will provide a $150 million loan to expand the company’s heavy rare earth separation capabilities at their California facility.
The DoD also provided further support with a 10-year off-take agreement in which the DoD will buy all of the magnets produced by the company, along with a 10-year price floor on NdPr oxide at $110 per kilogram, which is a little less than double the current market price, given PRC dumping of NdPr on the global market.
These agreements with the DoD allowed MP Materials to obtain a commitment letter from JP Morgan Chase and Goldman Sach to provide $1 billion in financing for the costs of constructing the processing and production facilities in California and Texas.
The Mine-to-Magnet Supply Chain
Two trends have been unfolding over the past 10-15 years. First, the relative importance of rare earth elements and permanent magnets has increased as these commodities and products get incorporated into electric vehicles and other advanced electronic systems. The second trend is that the PRC has vastly expanded its processing and production of rare earth elements and advanced magnets, this has reduced the cost of these commodities (encouraging industries to incorporate them into more products and accelerating the first trend) and has driven other producers/processors, in countries that are not the PRC, to stop their production as the price has gone down and environmental regulations have increased.
PRC entities involved in rare earth and advanced magnet production have pursued market share over profit by selling these goods at artificially low prices given PRC Government subsidies and lack environmental and labor standards. As PRC production increases, the cost of these goods goes down and industries begin finding uses for these materials in their own products that they would not have done had the cost been higher.
Commodity Markets… and their Failures
From a rational economic perspective, none of these efforts would be necessary or wise… but we don’t live in a rational economic world, we live in a world of geopolitical rivalries. Religious commitment to free trade and resistance to industrial policy won’t change the fact that the PRC’s own industrial policies are harming us both economically and our national security.
One of the centerpieces of the CCP’s geoeconomic policies is to create market failures which provides Beijing geopolitical leverage. By subsidizing the production of rare earth elements and permanent magnets, the PRC floods the global market with their goods at a price that commercial players cannot match. This drives those commercial players out of the industry, providing Beijing with market dominance. With that market dominance, the CCP then weaponizes access to these goods as a method to coerce foreign governments and companies.
Unfortunately, the only solution to this problem (aside from capitulation to the CCP’s demands) is our own government intervention in the market. This means providing a commercial player with the kinds of funding and guarantees that would allow them to cover the costs of production and return profits to shareholders.
For some this seems like trying to “out China, China,” but I would differentiate this action, which is a response to a market failure created by the PRC in a very specific sector, to the broad-based industrial policies implemented by the PRC.
Industrial Policy with American Characteristics
For at least the last decade, Americans (as well as Europeans and Japanese) have been wrestling with an inconvenient truth: while we may prefer neo-liberal economic policies in which the market, not states, determines the flow of economic activity and prices, we live in a world which is increasingly determined by state-directed industrial policies. Unfortunately, those policies are NOT our own and they are designed to put us at a disadvantage.
The PRC’s industrial policies are reshaping the global economic order and trade patterns. Beijing employs these policies to reduce its vulnerability to the rest of the world, while it makes the rest of the world more vulnerable to Beijing’s coercion (aka ‘dual circulation’).
The hope of American (as well as European and Japanese) policymakers had been that we could persuade China’s leaders to embrace our neo-liberal preferences. In the language of the Obama Administration, this was the “bind” portion of their “Engage, Bind, and Balance” policy towards the PRC. In essence, “bind” the PRC to our preferred international rules and norms. For someone like Robert Zoellick during the Bush Administration, this is what he meant when he called on Beijing to become a “responsible stakeholder.”
We should be honest with ourselves, the Chinese Communist Party rejects our vision of market-driven economic and trade policy, and they refuse to be bound by the rules and norms associated with that system… even as they gaslight us about upholding multilateralism and the World Trade Organization (see Beijing’s response to the speech by the European Commission President this week, #2 and #3 below)
When the PRC was an economic midget, their refusal to play by these rules was an inconvenience but didn’t do much harm. Western leaders believed they had time to persuade the PRC to change its ways and make itself soluble to the rules-based international order. That isn’t the situation we face today. The PRC is now of such economic, industrial, and technological stature as to fundamentally alter global markets.
We all live in a global economic system that is determined by PRC industrial policy.
To deal with this new reality, the United States will need to adopt an industrial policy with American characteristics. Washington has been inching closer to this, starting in the first Trump Administration with efforts to employ tariffs, export controls, and other economic statecraft tools to deal with the massive disruption that the PRC has had on the global economy. The Biden Administration continued these efforts, and we are seeing them evolve with the second Trump Administration.
This week’s announcement by DoD and MP Materials about magnet production provides some insight into what I think this Americanized industrial policy will look like.
First, it will be narrowly focused on specific market failures impacting specific industries. The mining and processing of rare earth elements like neodymium (Nd) and praseodymium (Pr), as well as the manufacture of permanent magnets using these commodities, is a very narrow and relatively small industry (even if it has outsized impacts on the broader economy and defense industrial base).
To provide some sense of scale, the total global annual production of neodymium is about 220,000 tons and for praseodymium it is about 12,000 tons, the value of that is about $6 billion for neodymium and $1 billion for praseodymium. To put that in context with another part of the mining industry, the total global annual production for iron ore is about 2 billion tons at a value of about $180 billion.
Here is one way to visualize this disparity:
Very Large Bulk Carrier (VLBC) can transport around 300,000 metric tons.
A single VLBC (Very Large Bulk Carrier) could transport the entire global annual production of neodymium (and have space left over), and the same ship could carry 25 years’ worth of praseodymium.
It would take nearly 7000 of these ships to transport the global annual production of iron ore.
So, these rare earths are certainly valuable, and they contribute to making valuable and strategically important products, but the global mining industry, as a whole, is valued at about $2.3 trillion. These two elements make up a relatively small fraction of that industry and the U.S. demand for these rare earths make up just a fraction of the global annual production.
These investments (about $500-$600 million) by the DoD into this narrow slice of the mining industry helps provide a sustainable source of supply over the next decade to the American defense, aerospace, electronics and automotive industries that have a combined value of about $3 trillion.
It would be better if the United States could rely on the global market to provide rare earths and permanent magnets for these industries, but Beijing has purposefully weaponized them. Making it necessary for the U.S. Government to intervene and guarantee a secure source of supply.
The second characteristic will likely be that U.S. Government investment is used as leverage to unlock additional capital from the private sector. The $1 billion from JP Morgan Chase and Goldman Sachs is a business decision based on both the explicit commitment by the U.S. Government as the largest shareholder in MP Materials AND the 10-year off-take agreement which provides a pricing floor for MP Materials’ products.
Without the long-term off-take agreement, it is doubtful that banks would provide that kind of lending. As we have seen in the past, the PRC is likely to dump rare earths on the global market to drive down the price and force their competitors out of business. Without the off-take agreement, this is what Beijing would have done to MP Materials. A guaranteed price floor of $110 per kg of NdPr materials gives MP, its shareholders, and its lenders, a degree of certainly that Beijing’s dumping won’t undermine the company.
The third aspect of “Industrial Policy with American Characteristics” isn’t yet obvious with this announcement: will the U.S. Government waive environmental restrictions and obstacles associated with NEPA (National Environmental Policy Act of 1970)? NEPA created a prohibitively high barrier for new industrial or manufacturing activities in the United States by requiring that federal agencies determine if proposed actions will have a significant environmental effect. Litigation by environmental groups and other local constituencies has created a byzantine maze of environmental impact reviews and approval processes that grind to a halt those efforts that receive government support. Case in point, the high-speed rail in California, countless clean energy projects, and the last Administration’s efforts to build EV charging stations across the country (see the book Abundance by Ezra Klain and Derek Thompson to get a sense of the impact that NEP has had).
Overcoming NEPA, perhaps for just these narrow and strategically significant activities like rare earth processing and permanent magnet production, will likely be a critical aspect of any industrial policy pursued by the United States.
I think this is a really important area to watch and I’m glad to see that the United States Government is finally taking action to address Beijing’s purposeful manipulation of market failures for their own benefit.
Thanks for reading!
Matt
To read the article as published on the China Articles Substack, click here.